Updated from 1:29 p.m.

DirecTV

(DTV)

showed strong subscriber growth in its latest quarter.

But the subscriber additions came at the cost of lower-than-expected cash flow and an increased number of deadbeat customers.

"On the sub side, the numbers were great," DirecTV CEO Chase Carey said on a conference call Tuesday.

But, as executives indicated on the call, the company has been less than diligent in doing credit checks on new subscribers, and ended up terminating greater numbers in the third quarter for nonpayment. "The growth strained the system," said Carey.

Tuesday's results, which mirrored August's

second-quarter results, sent the stock down 3%.

For the third quarter ended Sept. 30, the satellite TV operator reported a net loss of $1 billion, or 73 cents per share, compared with a per-share loss of 2 cents one year earlier.

Subtracting out discontinued operations and an after-tax charge of $903 million to cover a previously announced impairment charge related to an abandoned high-speed data service, DirecTV reported a 2-cent-a-share loss. That compares with the Thomson First Call consensus of a break-even quarter.

Revenue amounted to $2.86 billion, up from $2.38 billion in the third quarter of 2003 and ahead of the $2.75 billion mean of analysts' wide-ranging estimates.

Operating profit before depreciation and amortization at DirecTV's U.S. operations amounted to $145 million for the quarter, down from $235 million one year earlier and below expectations of about $190 million.

The company attributed the weakness to increased subscriber-acquisition costs related to high gross subscriber additions and an increase in the number of set-top boxes and digital video recorders purchased by new subscribers.

In addition, DirecTV said it had higher upgrade and retention costs for current customers, with those customers taking options such as DVRs, high-definition TV equipment and local channel equipment upgrades.

The company reported 484,000 net subscriber additions, at the high end of analysts' expectations and up from 326,000 in the third quarter of 2003.

DirecTV now has 12.1 million owned and operated subscribers -- that is, subscribers other than those in territories formerly controlled by members and affiliates of the National Rural Telecommunications Cooperative. Including those, DirecTV now has 13.5 million subscribers in the U.S.

Gross owned and operated subscriber additions grew to 1.1 million for the quarter, beating expectations and rising 33% from year-earlier figures.

But average monthly subscriber churn -- the percentage of customers who drop the service each month -- grew to 1.67% from 1.6% a year ago, reversing the drop that analysts had been expecting.

"Clearly, we didn't get to a churn number we wanted to," Carey said.

"The key concern is churn, which at 1.67% is substantially higher than our forecast of 1.4%," Sanford C. Bernstein analyst Craig Moffett wrote in a note published before Tuesday's conferernce call. DirecTV attributes the churn "to 'a more competitive marketplace,' and, most concerning, to 'high involuntary churn' (i.e. disconnects for non-payment)," writes Moffett. "The latter could cast a question about the

quality

of gross additions in recent quarters."

Indeed, DirecTV indicated that the nonpayment problem was the biggest component of the churn rate, with involuntary churn accounting for 45% of all churn in the current quarter, compared to 40% one year earlier.

Also contributing to subscriber defections was competition from cable operators that reached "a new level of intensity," said Mitch Stern, CEO of DirecTV's U.S. operations.

A bright spot for DirecTV was acquisition cost per gross subscriber addition, or SAC, which the company reported to be $617 for the quarter, up from $590 a year ago but well below analysts' expectations of about $650. While it appears that the cost came down from transferring some subscribers from NRTC, numbers that DirecTV supplied on the call indicate that SAC would have been $623 ignoring the NRTC numbers.

DirecTV's shares fell 52 cents Tuesday to $16.50. The stock had been trading around $17.40 earlier in the day, but dropped quickly following the midmorning release of quarterly financials.